Canada: Federal Court Of Appeal Confirms That R&D Costs Paid By A Canadian Subsidiary To Its U.S. Parent Are Dutiable For Canadian Customs Purposes

On March 2, 2015, the Federal Court of Appeal (the "FCA"), in the decision Skechers USA Canada Inc. v. President of the Canada Border Services Agency1, upheld the judgment2 of the Canadian International Trade Tribunal (the "CITT") to the effect that payments made by Skechers USA Canada Inc. (the "Appellant") to its parent company, Skechers USA Inc. (the "Parent"), for research, development and design expenses as part of an internal cost-sharing agreement (the "CSA") must be included in the price paid or payable for the footwear imported in Canada by the Appellant for customs valuation purposes.

Facts and Background

The Appellant and its Parent were in the business of selling Skechers-brand footwear. The footwear, which was designed by the Parent and manufactured in China, was sold by the Parent to the Appellant for resale in Canada. The Parent's research and development team designed, prepared and developed approximately 40,000 to 50,000 prototype samples every year. Of the prototypes developed, only 5,000 were typically retained for mass production after a five-month selection process (the "Process"), and only 1,700 were eventually marketed by the Appellant in Canada.

The transfer price invoiced to and paid by the Appellant in consideration for the footwear was the sum of the price paid by the Parent to the Chinese manufacturer, the cost of shipping the goods to the United States, the Parent's warehousing costs in the United States, and an arm's length profit for the benefit of the Parent (the "Transfer Price"). In addition to the Purchase Price paid to the Parent for the goods delivered in Canada, the Appellant also made payments pursuant to the CSA. Under the CSA, the Appellant and other Skechers affiliates compensated the Parent for the expenses it incurred for research, development, design, advertising and marketing activities that were necessary for the development and maintenance of the Skechers brand and the sale of its footwear. The portion of the Appellant's obligation under the CSA was determined on an annual basis and was calculated based on a ratio between its anticipated operating profits and the anticipated operating profits of all participants in the CSA.

In order to determine the value for duty of imported goods under the Customs Act (the "Act"), subsection 47(1) provides that the primary method that should be used by an importer is the "transaction value" method, which is based on the "price paid or payable" for the goods when they are sold for export to Canada. The term "price paid or payable" is defined under subsection 45(1) of the Act as: "[.] the aggregate of all payments made or to be made, directly or indirectly, in respect of the goods by the purchaser to or for the benefit of the vendor." (our emphasis)

In the case at hand, the Appellant used the Transfer Price to determine the "price paid or payable" pursuant to the "transaction value" method for customs valuation purposes. However, in 2012, the Canada Border Services Agency (the "CBSA") took the view that the "price paid or payable" for the imported footwear should also include a portion of the amounts payable under the CSA by the Appellant that related to research, development and design expenses incurred by the Parent (the "R&D Payments"). The CBSA's position was based on the assessment that the R&D Payments were sums actually paid "in respect of" the imported footwear for the purpose of subsection 45(1) of the Act. The Appellant appealed the CBSA's decision before the CITT.

The CITT's Decision

In December 2013, in a somewhat controversial decision, the CITT upheld the CBSA's interpretation and confirmed that the R&D Payments, in their entirety, were made "in respect of" the imported footwear and should therefore be included in the value for duty calculation under the Act. The CITT considered that the footwear in issue could not have been produced without the research and development by the Parent, and that the R&D Payments were "inseparable from the footwear products themselves."3

The CITT was of the opinion that a sufficient link existed between the R&D Payments and the imported footwear. The CITT also rejected the Appellant's arguments that the R&D Payments were general payments which were unaffected by the imported footwear. This conclusion was reinforced by the fact that the majority of the Appellant's profit was generated by the sale of footwear, and all of the footwear it purchased during the relevant period came from the Parent (even though it was possible for the Appellant to purchase footwear from third parties).

Finally, the CITT concluded that the Appellant was not providing "assists" within the meaning of clause 48(5)(a)(iii)(D) of the Act, and that the R&D Payments did not represent an indirect "assist" supplied to the Chinese manufacturers (through the Parent) because the Appellant was not providing any assistance in kind but only payments to the Parent.

Decision of the FCA

The FCA first established that the standard of review that was applicable to the CITT's decision was the reasonableness standard. This decision was based on the fact that the CITT is a court with a particular expertise regarding the application of the Act.

The Appellant pleaded that the CITT's decision was unreasonable because: (i) the burden of proof imposed by the CITT was improper inasmuch as it required the Appellant to demonstrate that the R&D Payments were not made in respect of the imported footwear, (ii) the CITT improperly interpreted both the Act and the CSA, and (iii) the CITT made several errors in its use of the relevant authorities. The President of the CBSA, for his own part, submitted that the CITT's decision was reasonable.

The FCA rejected each of the Appellant's arguments. Firstly, it agreed with the CITT's understanding of the burden of proof as requiring the Appellant to demonstrate that the R&D Payments were actually not made "in respect of" the imported footwear.

Secondly, the FCA stated that the CITT's conclusion to the effect that the R&D Payments were "in respect of" the imported footwear was reasonable. In the FCA's opinion, the evidence allowed the CITT to draw the conclusion that the Process was required to produce the imported footwear. Moreover, the FCA rejected the Appellant's argument that the purpose of the CSA was to apportion the costs of developing intangibles and that the R&D Payments were therefore "in respect of" the intangibles rather than the imported goods.

Finally, the FCA agreed with the CITT that the phrase "in respect of" had the same generic and equally applicable meaning in the context of the Act as in the Indian Act and that the CITT had relied on the appropriate case law in its analysis.


Importers should now review all payments they make to a vendor, in additions to the invoice amount or transfer price, in order to determine if any of these payments relate to research, design and development expenses incurred by such vendor. To the extent that these expenses are in respect of the goods purchased from the vendor, it is likely that they will have to be included in the value for duty of the imported goods. Based on the Skechers decision, the courts will take a very broad approach in determining whether an expense is in respect of imported goods, with the result that even expenses that relate to goods which are not ultimately imported into Canada, or to unsuccessful designs, may have to be included in the value for duty.

The authors wish to thank Nicholas Grenier for his valuable collaboration in drafting this article.


1 2015 FCA 58. [Skechers]
2(2013), AP-2012-073 (CITT).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.